The latest last-ditch effort to keep the euro zone from unravelling – the 15th such crisis summit in less than two years, for those keeping score – started with the usual dire warnings, coupled with efforts to rein in expectations.
The euro's self-anointed saviours-in-chief, German Chancellor Angela Merkel and French President Nicolas Sarkozy, fittingly divided the duties. The two leaders have been operating so closely of late that their governments issued a joint reply last Monday after Standard & Poor's threatened euro-zone countries with possible debt downgrades if they don't corral the contagion.
Mr. Sarkozy handled the fear-mongering. The "risk of explosion is looming, if the decisions taken with Angela Merkel are not put into effect," he told a gathering of his own conservative party. He also declared that there would be no second chance to fix the euro-zone mess.
Ms. Merkel took care of the hope-dampening by indicating the summit was but one step on the long road to complex treaty changes and the new fiscal union that is the centrepiece of the "Merkozy" strategy. What's worse, she again underscored German opposition to two moves that would actually have an immediate impact: unlimited bond purchases by the European Central Bank; and region-wide euro-bonds or guarantees that would help restore shattered investor confidence in debt issued by Italy and other troubled governments.
The deal that was eventually battered out on Friday was clearly in keeping with the wishes of its two parents. No euro-bonds (although they remain under consideration, according to Greek Prime Minister Lucas Papademos). No suggestion of any forceful intervention by the ECB. But enough progress to give the euro-optimists reason for hope and yet another summit.
The intergovernmental agreement among the 17 euro zone members and a cluster of other European Union nations outside the single-currency bloc enshrines the fiscal discipline so dear to the Merkozy contingent. Of course, the new promises look suspiciously like the existing guidelines that every country, including Germany, has breached at some point. But this time, there really will be serious punishment for the transgressors, honest. Only Britain's stubborn refusal to sign on to the accord stymied Ms. Merkel's grand ambition for an EU-wide treaty.
This rush to reshape Europe along Germanic fiscal lines could lead to the destruction of the EU itself, warns famously bearish financial historian Niall Ferguson. Indeed, the long-time euro skeptic thinks the single currency may have a better chance of surviving than the EU, because the costs of going back to individual currencies would be so prohibitive.
"The latest round of the Merkozy soap opera involves the proposal that all European governments will commit themselves to binding deficit ceilings, with instant and automatic fines if they breach those," Prof. Ferguson said the other day on a visit to Toronto to plug his latest book, Civilization: The West and the Rest. "Gee, I've heard something like this before. ... It's called the Stability and Growth Pact, and everybody breached the rules."
And he called the idea of mandatory balanced budgets "Neanderthal economics. Binding everybody to have very low or zero deficits is wildly unrealistic." That's because it ignores something called the economic cycle and because all European countries face "a structural crisis of public finance," driven by a combination of aging populations, shrinking work forces and rising social costs.
Meanwhile, the blame for turning a serious crisis into something vastly more dangerous to Europe's future rests squarely on Ms. Merkel's slumping shoulders.
"At this point, I don't see much evidence that the German government understands the gravity of the situation," Prof. Ferguson says. "There's a fundamental misunderstanding in German official circles about what the nature of the problem is. What we're actually dealing with is a very short-run crisis, not just of public finance but of bank finance and the wholesale funding of European bank balance sheets. And that is not a peripheral problem. That's a problem right through the European banking system."
The Europeans have long been in denial about the scale of their banking woes, he says. "They kicked the can down the road. Finally, the problems revealed themselves via the sovereign debt market."
He has joined the large camp of critics calling for massive intervention by the ECB to stabilize the European bond market. "If it doesn't do that, I think the whole system is going to crash and burn."
And he's not just talking about the euro zone. "The scenario we have to think about here is that the euro survives, but the European Union, as we know it, falls apart."
The most hopeful scenario is that the summit agreement provides enough cover for the ECB to eventually step in and do what is necessary to keep the euro zone intact – including even debt-crushed Greece. "I think they can save it, although ... everything hinges on [ECB head Mario]Draghi getting a green light to print euros very aggressively. But I don't think it can be salvaged if people start to peel away. Even if one country were to be ... ceremonially ejected, the contagion effect for Portugal or for Spain would, I think, be pretty disastrous."
Here's how dire Europe's predicament has become: Pope Benedict XVI said a prayer for the EU on the eve of the summit. Unless the Germans take the shackles off the central bank and stop trying to force through a made-in-Berlin fiscal solution that has no hope of broad public support, the Europeans may be in need of a requiem for their cherished union.